Exchange rate regimes and banking crises: the channels of influence investigated

We investigate the effects of alternative exchange rate regimes on the probability of banking crises using a new set of classifications from the IMF that allows us to distinguish between hard and soft pegs. We find that this distinction is quite important and helps explain some of the contradictory results of previous studies. We go beyond analysis of the total effects on crises and investigate some of the major mechanisms through which exchange rate regimes can affect a country's susceptibility to banking crises. These are domestic credit growth, net foreign borrowing, and currency crises: we find stronger linkages for the last two channels than the first. We find evidence that the unstable middle hypothesis applies with respect to banking crises as well as currency crises.